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Enter Symbol
or Name
USA
CA



H2O Innovation Inc (2)
Symbol HEO
Shares Issued 20,926,551
Close 2016-07-12 C$ 1.50
Market Cap C$ 31,389,827
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H2O Innovation to buy Utility Partners for $17M (U.S.)

2016-07-13 11:27 ET - News Release

Mr. Frederic Dugre reports

H2O INNOVATION ENTERS US OPERATION AND MAINTENANCE MARKET WITH THE ACQUISITION OF UTILITY PARTNERS AND CONCURRENT PRIVATE PLACEMENT OF $20M

H2O Innovation Inc. has entered into a binding agreement pursuant to which H2O Innovation will acquire Utility Partners LLC, a U.S.-based company specializing in the operation and maintenance of water and waste water treatment plants. The purchase price is $17-million (U.S.), representing 7.6 times the adjusted earnings before interest, taxes, depreciation and amortization as of Dec. 31, 2015, and will be paid in cash and financed as described below.

Utility Partners provides U.S. municipal clients with innovative and cost-effective solutions for water and waste water treatment plants. It currently operates 34 plants in six U.S. states, mainly on the U.S. Gulf Coast, Southeast, Northeast (New England) and the West Coast (California/Nevada). Utility Partners' long-term contracts have multiyear renewal options with expected revenues of approximately $88.3-million over the next five years.

Management expects the acquisition to be accretive to earnings and cash flow from day one. In addition, following the acquisition, the majority of H2O Innovation's revenues will be derived from its specialty products and services segment, which are more predictable and recurring in nature. For more information on the acquisition, please visit the section of H2O Innovation's website dedicated to investors.

"The acquisition of Utility Partners is a significant step to building H2O Innovation's third business pillar, the operation and maintenance of water and waste water treatment systems. The acquisition will help us better serve our existing clients through a stronger service and product offering tailored to meet their needs. Utility Partners and its team of managers and professionals will be a significant asset for H2O Innovation. We expect this alliance to open the door to a new market and create several cross-selling opportunities between our business lines," said Frederic Dugre, president and chief executive officer of H2O Innovation.

"When we initiated discussions with potential partners, we were interested in compatible corporate cultures to ensure our teams would work well together, as well as additional capabilities with client opportunities to fuel continued growth. H2O Innovation was the most suitable partner given its strong equipment business which will help in better supporting our existing customers in all of their water treatment needs. As we see significant growth in design-build-operate (DBO) contracts, H2O Innovation, once integrated with Utility Partners, will become one of the only players able to provide high-quality process equipment, as well as operation and maintenance services. This new offering will make H2O Innovation attractive to general contractors and teams targeting a growing number of DBO opportunities currently being planned across the United States," said Robert Monette, PE, president of Utility Partners.

Financial highlights of acquisition

Audited revenues of Utility Partners for its fiscal year ended on Dec. 31, 2015, amounted to $34.5-million ($26.9-million (U.S.)) with an adjusted EBITDA of $2.9-million ($2.2-million (U.S.)). In addition, for the same period, Utility Partners' net income was $1.5-million (U.S.), the total value of its assets amounted to $6.3-million (U.S.), and total liabilities and equity were $1.5-million (U.S.) and $4.8-million (U.S.), respectively.

As per the unaudited financial statements for the first quarter ended on March 31, 2016, Utility Partners' net income was $309,610 (U.S.), total assets amounted to $5.2-million (U.S.), and total liabilities and equity were $1.8-million (U.S.) and $3.4-million (U.S.), respectively.

Pro forma for the acquisition, H2O Innovation's unaudited revenues, pro forma adjusted EBITDA and pro forma adjusted EBITDA margin for the 12-month period ended Dec. 31, 2015, will increase to approximately $83.6-million, $5.8-million and 7 per cent, respectively.

Concurrent financings

H2O Innovation is acquiring Utility Partners for a purchase price of $17-million (U.S.), on a cash-free, debt-free basis, representing 7.6 times the Utility Partners adjusted EBITDA for the 12-month period ending Dec. 31, 2015. The purchase price is subject to customary working capital adjustments as of the closing date.

H2O Innovation intends to finance the acquisition with an equity financing, by way of a bought deal private placement, for an amount of approximately $18.4-million. Concurrently, H2O Innovation will complete a non-brokered private placement with certain insiders in the amount of $1.6-million and an additional $10-million long-term secured credit facility.

In the context of the underwritten offering, H2O Innovation has engaged a syndicate of underwriters led by GMP Securities LP and including Beacon Securities Ltd. to sell 15,333,333 subscription receipts of the company at a price of $1.20 per subscription receipt, for aggregate gross proceeds of approximately $18.4-million. The company has also granted the underwriters an option to purchase up to an additional 2.3 million subscription receipts at the same price, exercisable at any time prior to 48 hours before the completion of the underwritten offering, for additional gross proceeds of up to approximately $2.8-million. If the closing of the acquisition occurs concurrently with the closing of the underwritten offering, the company will deliver common shares instead of subscription receipts to investors in the underwritten offering.

Certain insiders of H2O Innovation have indicated their intention to participate in the underwritten offering, including Investissement Quebec for an amount of approximately $4.35-million.

In addition, the company intends to complete a concurrent non-brokered private placement of common shares with two directors of H2O Innovation who are U.S. residents, one of which is Richard Hoel (who currently holds 10.18 per cent of the company's common shares), as well as Mr. Dugre, Marc Blanchet, chief financial officer, and Guillaume Clairet, chief operating officer, at a price of $1.20 per common share, for aggregate gross proceeds of $1.6-million. Subject to securing all necessary approvals, the company will extend to Mr. Dugre, Mr. Blanchet and Mr. Clairet individual loans in an aggregate amount of $1.25-million in order for them to acquire such common shares. The loans will bear interest at a rate of 2.5 per cent, be secured by a pledge of the acquired common shares and be reimbursed upon predefined repayment conditions.

The participation of insiders of the company in the offerings, as well as the loans by the company to certain officers, constitute related party transactions as defined under Regulation 61-101 respecting protection of minority securityholders in special transactions. The subscription receipts and the common shares, as the case may be, issued to insiders will be exempt from the formal valuation and minority shareholder approval requirements of Regulation 61-101, as neither the fair market value of securities being issued to insiders nor the consideration being paid by insiders will exceed 25 per cent of the company's market capitalization.

The common shares acquired by Mr. Dugre, Mr. Blanchet and Mr. Clairet pursuant to the additional placement will be held in escrow until such time as the loans have been approved by the disinterested shareholders of the company.

The gross proceeds of the underwritten offering less 50 per cent of the commission payable to the underwriters will be held in escrow pending confirmation from the company that all closing conditions have been satisfied (or waived), except for the payment of the purchase price. Upon delivery of the release notice, the subscription receipts will be automatically exchanged for common shares. If the release notice is not provided on or before Sept. 30, 2016, or the company, prior to the termination time, advises the underwriter or the public that it does not intend to proceed with the acquisition, the escrowed proceeds will be reimbursed to each holder of subscription receipts at the original subscription price.

If the overallotment option is exercised in full, the total gross proceeds to H2O Innovation from the sale of subscription receipts will be approximately $21.2-million. The company has agreed to pay a commission equal to 5 per cent of the gross proceeds of the underwritten offering to the underwriters.

The company intends to use all the net proceeds of the offerings to pay for the acquisition price and the costs associated with the offerings. Any other amount required to pay for the acquisition will come from the $10-million credit facility, the balance of which will be used for working capital postacquisition and to support research and innovation initiatives.

All securities to be issued under the offerings (including the common shares issuable upon conversion of the subscription receipts) will be subject to a four-month hold period following the closing date.

Closing of the acquisition

The acquisition and the financing are expected to close on or about July 26, 2016, and are all subject to customary conditions, including all necessary approvals of the TSX Venture Exchange.

Advisers

GMP Securities LP acted as exclusive financial adviser and McCarthy Tetrault LLP and Troutman Sanders LLP acted as legal advisers to H2O Innovation in connection with the acquisition and the financing.

H2O Innovation conference call

Mr. Dugre and Mr. Blanchet will hold an investor conference call to discuss this announcement in further detail at 1 p.m. ET on Wednesday, July 13, 2016. To access the call, please call 647-788-4922 or 877-223-4471 five to 10 minutes prior to the start time. Presentation slides for the conference call will be made available on H2O Innovation's website.

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